Friday, June 3, 2016

Pay attention to the Tide.

 Over the past six months or so, I have been seeing the equation getting out of balance or not making sense.  2 + 2 has to = 4 or at some point other factors will.  As you can see from the chart below, we are extended past the last re balance.  Normally the equation or cycle adjusts every 7 years.  The jobs data is only one factor to look at. 

Change in Payroll Jobs Jan 08 - Jan 17
Another very important factor is what is supporting the stimulus?

In the beginning of the recovery (see the chart below), you can see it was supported by liquidity in the credit markets which trailed off and or was dwarfed by long term treasury purchases.  The purchases are government and safety related.

The positive and or negative aspect of this scenario is that the economy will experience another economic pullback, the flight to safety (real estate) will be a cornerstone of low risk tolerant families and a generation of non-stock investing Millennials.  We are already surging in volume from this prediction and preparation last year when we initially saw it.

Due to the changes in the mortgage industry's regulation and the lack of funding for non sustainable product, there is no need for a rebalance in our industry and I do not anticipate one.  Some are advertising and adding unsustainable product to boost revenue.  This reduces the draft they need to navigate the coming tide.  Southeast Mortgage, SEM, always plans to run well in any tide with sustainable product, great service, and a diverse source and mix.  I am so confident, we are investing in another 31,000 square feet of Operational and Employee Work / Life balance space that comes online in September 2016.

As with past cycles, a great plan and learning from the past is critical to prospering during an economic down turn.  Leadership and Companies tend to have a safe geographic area that they live in and work in.  They may expand out during HAPPY times, but they always pull back to their home states when the economy turns.  SEM lives and works in Georgia and thus we have been open for business since 1993 with the same leadership and corporate structure.  We can drive to AL, FL, and SC thus we remain balanced and service our markets in any tide.

Luck favors a great plan and execution.  Even though you have to be in the right place at the right time to derive more than the average, you have to plan for what if.  A strong balance sheet with cash to fund without warehouse banks becomes relevant.  Organizations that expand past their home foot print must fund the additional cost via their balance sheet or debt from other sources.  When the economy turns, the dominos fall from highest debt to lowest debt which in our industry generally correlates to experience and how stretched the span of control is.

Nobody knows the timing, we just read the tide and plan accordingly.  MLOs and Mortgage companies can do very well in downturns; however, boats that run at high tide despite their weight generally hit the bottom before more nimble boats as the tide gets too low.  Its best to have a wide "diverse" boat that runs great at high tide and low.  We can only control the boats weight (debt), strategic plan (sustainable product), and engine (Great Service Oriented Operations TEAM).  You cannot control the tide.  You can only control what boat you step on.  Now is the time for Mortgage Professionals, MLO's, MLO Assistants to put themselves in a position to maximize this recovery over the next few years and know the foundation they build will support them during an economic contraction.  The next recession will be the fourth that SEM navigated.  When you step on a plane do you feel better knowing you have a 30 year veteran at the stick flying the same dependable plane.

Depending on your boat the fishing will be great for the foreseeable future.

Cal Haupt
Chairman and Chief Executive Officer
Southeast Mortgage of Georgia, Inc.

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